Disposable Income- Introduction

When a person files bankruptcy, they are required to show the court how much money they have left over each month after paying their living expenses. This is referred to as their bankruptcy disposable income.

If there is enough money left over after paying living expenses, the bankruptcy court will expect the person to propose a plan to repay their creditors some of what they owe.

Often there is not enough money left over each month to fund a repayment plan and the bankruptcy is filed as a Chapter 7 bankruptcy.

If there is enough money to fund a repayment plan, the bankruptcy is often filed as a Chapter 13 bankruptcy.

[Note: there are other critical factors to consider before filing a case as Chapter 7 or Chapter 13. But, this post focuses on the means test.]

Disposable Income: Both Current Income and Historical Income

A bankruptcy filer’s “disposable income” must be presented in two different ways in a bankruptcy petition.

(1) The bankruptcy filer must prepare a list of their current income and expenses. The current income and expenses schedule is just what it sounds like: a list of your current, real-life monthly income and expenses.

(2) The bankruptcy filer must also prepare a hybrid, historical calculation called the bankruptcy means test.

The bankruptcy means test is also an analysis of your income and expenses. But, your means test “income” is deemed to be an average of your monthly income for the six months leading up to your bankruptcy filing date.

If you have recently changed jobs, been laid off, or received a big bonus, your average monthly income might look very different from what your typical monthly income will be going forward.

What Can I Deduct for Expenses on the Means Test?

When it comes to expenses, the means test keeps it weird.

Instead of allowing you to deduct your actual, real-life expenses, it limits you to standard IRS deductions for many categories of expenses.

These IRS standards are adjusted from time to time. They readjusted on April 1, 2022. Here is the list of new IRS standards used on the bankruptcy means test.

For some expenses on the means test, you are allowed to deduct your actual, real-life expenses. But, you need to know when this is allowed. That can mean consulting the case law in your jurisdiction.

Does the Means Test Apply to Everyone?

No, the means test does not apply to everyone.

You can skip the means test analysis if you are (1) a disabled veteran whose debts were incurred during active duty or (2) your debts are primarily non-consumer debts.

Assuming you are required to “take” the means test, you will use the steps described below.

Bankruptcy Means Test Step One: Compare your average monthly income to the median income for your family size in your state.

1. Determine your whether your “current monthly income” is higher than the median income for a household the same size as yours in your state.
2. Here are the current median income figures to be used in cases filed after April 1, 2022.
3. Your “current monthly income” is your average monthly household income over the six months prior to your bankruptcy filing.
4. What is included in “average monthly household income”? That’s a good question. You may need to look to the case law in your jurisdiction to be sure you are calculating it correctly. It is a good idea to consult an attorney.
5. If your income is less than or equal to the median income for a household the same size as yours in your state, you are presumed to be eligible to file Chapter 7 bankruptcy.
6. If your income is more than the median, you must proceed to the next step…the full means test.

Bankruptcy Means Test Step Two: The Full Means Test

1. If your average monthly income for the six-month period prior to filing is higher than the median income for a household the same size as yours in your state, you need to take the “full” means test to determine if you are presumed to be eligible to file Chapter 7 bankruptcy.
2. While there are several means test calculators available on the internet, many of them are not reliable.
3. When completing the means test, it is very important to be sure you disclose ALL expenses and income.
4. Sometimes people are embarrassed of high expenses and will try to minimize them. But, disclosing all expenses can help you qualify to file a Chapter 7 bankruptcy.
5. While the means test uses defined, “set” amounts for some expenses, you are allowed to deduct your actual expenses for other items. (Also discussed above.)

Bankruptcy Means Test Step Three: What if I “Failed”?

1. If the means test seems to show that you have too much disposable income to file Chapter 7, this only establishes a presumption that a Chapter 7 filing would be “abusive.”
2. If you have extraordinary circumstances, you may be able to overcome this presumption and establish your eligibility to file a Chapter 7 bankruptcy and receive a discharge.

Again: if you think you are ineligible to file Chapter 7 because of the means test, be sure to consult an attorney. You may not be taking your full situation into account when doing the calculation, and / or you may be able to overcome a presumption of abuse.

Give us a call for a free bankruptcy consultation. We’ll be happy to run a preliminary means test calculation for you.